The U.S. will lose access to critical materials used in military technology and the country’s electrical grid if the Obama administration approves the controversial sale of a bankrupt American company to a Chinese manufacturer, warns a former Defense Department official.

The Wanxiang Corporation has moved to snatch up the failed A123 Systems enterprise that was financed in part with a $249 million taxpayer-funded grant to produce advanced lithium ion batteries.

A decision is expected this month from the Treasury Department’s Committee on Foreign Investment in the United States (CFIUS) as to whether it will approve the sale or reject it on the grounds a sale poses a threat to national security.

Dean Popps, who served as deputy assistant secretary of the Army and acting assistant secretary of the Army for acquisition, logistics and technology under the Obama and George W. Bush administration, says losing the technology will hamper military readiness.

“You don’t want to be building a military spy satellite and be reliant on a lithium ion battery that’s made in China because you don’t make it anymore,” said Popps, who serves as co-chair of the Strategic Materials Advisory Council, which opposes the sale to Wanxiang.

The breakthrough technology produced by A123 Systems is far more advanced than other alternatives on the military market, and the U.S. should not be dependent on a foreign power, China in particular, to resupply the essential technology back to the U.S., Popps said.

CFIUS even warned in its annual report to Congress published in December that there is a coordinated strategy underway by foreign powers to acquire U.S. companies producing critical technologies.

“The U.S. intelligence community judges with moderate confidence that there is likely a coordinated strategy among one or more foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer,” said the unclassified version of the report.

Preferred tool in satellites

The cutting edge technology is the preferred tool used in satellite systems; military vehicles, the power grid and telecommunication systems and can withstand high heat and extremely cold temperatures.

A bankruptcy court approved the sale agreement with Wanxiang last month for $256 million, along with a separate purchase proposal from Navitas Systems for A123’s military contracts at a $2.25 million price tag.

However, the court seems to have overlooked the security implications of specific important cross-licensing agreements allowing Wanxiang to share intellectual property, facilities and equipment with Navitas, Popps said.

“The predisposition is to give the Chinese all of the company’s 91 patents and let them run through the tall cotton with all this stuff,” Popps said. “Once you let the Chinese in commercially into this thing, they are back-doored into the whole thing. You don’t want to be building a military spy satellite and be reliant on a lithium ion battery that’s made in China because you don’t make it anymore.”

Rep. Marsha Blackburn (R-Tenn.) has been a vocal critic of the sale’s impact on national security as well as the string of financial failures of alternative energy companies funded with tax dollars by the Obama administration.

Blackburn introduced legislation last week that would require the federal government to report to Congress proposed acquisitions by non-allied foreign nations of companies that taxpayers have helped fund. The bill also requires that the government recover the money from those loans or grants when the company is sold.

Battery maker A123 is one of 36 green companies that were awarded federal dollars from the Energy Department but are now facing bankruptcy or are laying off workers, including Solyndra, Evergreen Solar, Beacon Power, SunPower and SpectraWatt.

“We have repeatedly witnessed our tax dollars wasted on so-called stimulus projects that have ended in bankruptcy,” Blackburn said. “Even worse, we now have a situation where not only has A123 landed in bankruptcy proceedings but their taxpayer-funded technology could be handed over to the Chinese government. We owe it to the American people to, at a minimum, scrutinize potential acquisitions to assess the threat to the United States and the loss of taxpayer funded intellectual property.”

Concerns over the sale have been a bipartisan issue on Capitol Hill where Democrat and Republican senators have written Treasury Secretary Timothy Geithner warning the acquisition presents considerable risks.

Congress in the 1970s gave the president the authority to block business transactions deemed a threat to national security. The most prominent decision by CFIUS was approval of the Dubai port deal in 2006. However, the Senate voted to block the deal through new legislation and the port operations were eventually sold to a U.S. company.

Most recently, CFIUS blocked the Chinese energy developer Ralls Corporation from investing in an Oregon wind farm. The company filed a lawsuit against the committee in September challenging its authority.

“We know we’re fighting an uphill battle,” Popps said.

“The Chinese are all over us in a hundred different ways, from currency manipulation to what’s going on in Africa – the last battleground for us,” said Popps, referring to China’s efforts to acquire large tracts of African farmlands to increase their food source.

“That’s the next battleground over the next 25 years; it’s going to be over natural resources—who’s got water, who’s got food, who’s got energy and these guys know it and they’ve set out aggressively to control all of the supply chains,” Popps said.

The Chinese have already made a significant push into the U.S. economy with renewable energy technology, and control roughly 98 percent of the world’s rare earth minerals that are essential components in green and high technology, such as hybrid cars, iPods and solar panels.

“There are so many high tech requirements for rare earth components that we now don’t control, and even worse, we’re not even allowed to mine for them because of billions of dollars of costs from EPA constraints,” Popps said. “The supply chain has itself between a real rock and a hard place, and it’s time to have a national discussion about this.”